Vanguard Escalates Tactics in the ETF Cost War

Reverse split for the VOO fund moves cost war to bid-ask spreads

Individual investors should know full well by now the power of low-cost ETF investing, particularly under the Vanguard nameplate. Vanguard funds are typically passive, index-based investments that are marketed not on their fancy managers but their bare-bones cost structure.

Because, after all, active managers have sucked big-time in the last few years as the indexes have shown them up time and time again. For instance, in 2012, 63% of large-cap fund managers underperformed their benchmark, as did 80% of mid-cap funds and 67% of small-cap funds, according to Standard & Poor’s research.

But Dan Wiener, the editor behind the Independent Adviser for Vanguard Investors, says the war over rock-bottom fees is far from over. The latest tactics at Vanguard to push expenses lower include a reverse split on its flagship Vanguard S&P 500 ETF (VOO) that is benchmarked to the S&P 500.

Dan writes that the Vanguard reverse split strategy for its VOO ETF is “swiftly going to halve the bid-ask disparity on the security.” Here’s more detail from the Vanguard guru on how it works:

“Well, let’s say the current price for the ETF is $77.44 with a bid of $77.43 and an ask of $77.45. That two penny spread amounts to 0.026% of the share price. But if the fund does a reverse split and is now selling for $154.88 per share with the same two penny spread, the spread drops to just 0.013% and in the world of rapid-fire ETF trading, those increments add up.

Will it really matter to the individual investor buying or selling a few hundred or even a few thousand shares of VOO? Probably not. But for the traders looking for every edge and every sliver of savings, it matters. Consider that the SPDR S&P 500 ETF (SPY) trades around $169 per share (with an operating expense ratio of 0.09%) and the spread’s about the same. Well, that makes the SPY look like a better deal than the VOO to the guys flinging around tens or hundreds of thousands a share at a whack. Maybe that’s why, as of this writing, the VOO has traded just 600,000 shares today while the SPY has traded over 47 million!”

Wiener goes on to say that bid-ask spreads “are the new operating expenses in the fee wars” and that the reverse split shows that it’s not overall volume that’s in focus but this new metric.

Right now the SPY boasts $144 billion vs. just $11 billion for the VOO. It will be interesting to watch how this shakes out, and whether it affects which funds are in favor.

Will it really matter to the individual investor buying or selling a few hundred or even a few thousand shares of VOO? Probably not. But for the traders looking for every edge and every sliver of savings, it matters.